In the past year, venture capital (VC) funding directed at startups has decreased by more than half, with European funding in the first quarter of 2023 down 66% year-on-year. The severity of the tightening market – especially compared to the previous few years of technological disruption caused by Covid – is pushing founders to their limits as they try to secure the necessary capital for their business growth.
The situation requires reflection in the entire European community of entrepreneurs. While the current strategy of encouraging founders to pursue profitable growth and greater capital expediency is not a bad thing, we must also ask whether we are fulfilling our side of the bargain.
My conviction is clear: the current European venture ‘product’ is not enough to meet the short-term needs of founders.
The lack of diversity in the investment community leads to persistent groupthink, affecting not only the choice of founders and startups to support, but also the support offered to existing portfolio companies. And crucially, too few European VCs have the necessary company-building experience to guide founders through the current economic woes.
This is a topic we will discuss seriously SuperVenture conference in Berlin, 5-7. June, where I am moderating the panel debate featuring four industry professionals from Europe and the US with first-hand experience in addressing the current shortcomings of the VC industry.
Rodney Appiah is the founder and managing partner of Cornerstone VCwhich specializes in supporting team-oriented, people-centric startups and is focused on investing in diverse founders, Bettine Schmitz is a general partner at Auxxoan investment firm that focuses on female entrepreneurs, Stan Tamkivi is co-founder Plural Platform, which invests in embryonic technology companies that solve seriously hard problems. And Lo Toney is the founder and general partner of capital plexuswhich invests in seed-stage VCs led by various managers, as well as directly in their portfolio companies.
The question I will ask each of them is how can we build a better European venture product for the founders of the future?
Founders need guidance from operators who have walked the walk
The more homogenous the investment community is, the more we see a homogenous attitude towards building companies – pushed, more often than not, by individuals who have no practical experience in building companies themselves.
Stem Tamkivi is particularly critical of the current shortcomings of the European VC community. “Europe lacks founders turned investors. In Silicon Valley, at least 50% of all top VC investors have built a company; in Europe it is below 10%. Frankly, without this hands-on experience, it’s hard to see how VCs can materially help startups navigate the early-stage risks they face every day. These founders don’t need number crunchers or passive observers – they need seasoned professionals who can share practical advice and insights.”
For example, it is still a common view that founding requires a mentality and work ethic. Indeed, relentless determination is a quality that VCs actively seek in their future founders. This is despite research suggesting that entrepreneurs are 50% more likely to report than non-entrepreneurs mental health conditions. Experienced operators who have spent years on the fundraising treadmill understand the pressures faced by fellow founders. Too many European VCs just don’t get it.
A narrow view of founder experiences
Similarly, a VC industry that—for all its efforts toward greater inclusivity—remains overwhelmingly white, male, and comfortably middle-class, cannot profess a deep understanding of the additional hurdles founders of different genders, ethnicities, and backgrounds face.
“The ecosystem is not doing enough to create the conditions to allow underserved founders to thrive, nor has it stepped up support for founder mental health, which has taken a hit over the past three difficult years,” suggests Bettine Schmitz.
VCs must recognize their limitations, biases and blind spots. We all have them; it is part of being human. However, it is critical to address these constraints to improve the ecosystem. Again, experienced operators with lived experience of these challenges are far better placed to offer meaningful guidance.
That’s why we gathered a group of 20 angel operators at Ada Ventures. These diverse business leaders understand the funding journey from seed to Series A and can provide our portfolio companies with relevant advice and support wherever needed.
Our scouting-based approach to discovering new founders and opportunities is also an integral part of our work. With over 100 scouts from underrepresented communities, we can approach diverse founders and ensure their involvement in the venture process.
This is not only important for creating a more egalitarian tech ecosystem – it is essential for improving the health of European startups. There is no single approach to building a company. Greater diversity of gender, ethnicity and background creates greater diversity of thought and the emergence of unique perspectives that can help new companies reach their potential.
Bringing experienced operators to the table
To create a better European investment product, investors must take proactive steps to compensate for the lack of practical experience and protect themselves from the dangers of groupthink, i.e. the risk of repeating the same mistakes.
“We need to invent new mechanisms within the European tech ecosystem that attract experienced founders to help new ones,” Tamkivi claims. “We’re working hard on a variety of solutions that make our platform more attractive to these founders—even those who have shunned conventional VC funds in the past.”
If our community can address these shortcomings and improve the quality of thinking – and support – available to founders, Europe has a clear opportunity to lead the development of a more versatile and productive VC offering. As Schmitz points out, “the venture community doesn’t care about founders aiming for more modest—but still significant—returns of 3x-10x. That’s a huge funding gap for high-potential and often highly viable companies that are completely unaddressed.”
To truly serve founders, we must challenge groupthink, embrace diversity, and leverage hands-on experience that truly understands and can navigate the complexities of building a company. It is time to develop a European venture product to give the founders of the future a better basis for developing successful companies.
So if you’re attending SuperVenture next month, be sure to show up for our panel discussion – adding more perspectives to the debate can only be a good thing!
Forbes – Innovation